Many tax-exempt organizations benefit from the receipt of non-cash contributions. These non-cash contributions can come in the form of services by volunteers, pro-bono services from professional service providers, free or reduced rent, and publicly traded securities. Additionally, many tax-exempt organizations solicit donations in the form of goods, supplies/inventory, artwork motor vehicles and real estate.
The FASB issued Accounting Standards Update (ASU) 2020-17 expanding the reporting requirement for contributions of non-financial assets. Lisa Hann, CPA of the Bonadio Group authored a comprehensive article on the new standard which can be found here: Implementing the New Gifts-in-Kind Standard | The Bonadio Group. However, this article will focus on the tax deductibility of such contributions and some other related reporting requirements.
As a general rule, contributions are only deductible if they are made to qualified organizations. Not all tax-exempt organizations are considered qualified organizations. Examples of non-qualified tax-exempt organizations include civic leagues and associations, country clubs and social clubs, homeowner associations or labor unions, among others. Contributions to, or for the benefit of, specific individuals, even those who are truly in need, are not tax deductible.
The value of time or services provided, or personal expenses are not tax deductible, nor is the value of providing rent free space to an organization, even though for GAAP reporting these may be recorded on the financial statements provided they meet the standard for recognition. Additionally, the value of donated time, services or free rent would not be included in the contributions amount reported on Form 990. These would be reconciling items to the financial statements on Schedule D, Parts XI and XII 2a. There is an opportunity to disclose the receipt of donated time, services, and use of facilities within Schedule O to Form 990. Non-cash contributions received by organizations filing Form 990, other than donated time, services or use of facilities are reported on Schedule M to Form 990.
A receipt is necessary for any contribution claimed that is more than $250. The receipt must be obtained by the date the tax return is filed. The general rule is that Fair Market Value (FMV) is used for claiming a tax deduction. However, there are limitations, some of which will be discussed shortly. The donor is responsible for determining the fair value of non-cash contributions, not the recipient organization. The receipt provided by the organization should provide a description of the assets received but should not assign a value to the non-cash contribution received. Tax filers claiming non-cash charitable contributions need to complete Form 8283 to attach to their tax return.
Publicly Traded Securities
Donations of publicly traded securities can be deducted at the FMV at the date of the contribution. The donee organization should provide a description of the donated securities and the date of the donation. Acknowledgements should include that no goods or services were received in exchange for the donation. Form 8283 must be completed and attached to the tax filer’s return to claim the deduction.
Clothing and Household Items
Generally, only items that are in good used condition or better can be claimed as a deduction, unless a qualified appraisal is received. Form 8283, Section B must be completed and attached to the donor’s tax return. FMV of clothing is generally based on the amounts that such items would sell in a thrift shop. The value of household items may be more difficult to determine, accordingly ample documentation should be maintained documenting how FMV was determined. Simply using a percentage of cost is not an allowable FMV method.
Qualified vehicles are cars or motor vehicles manufactured mainly for use on public streets, roads or highways, a boat, or an airplane. Vehicle donations have been very popular, and organizations tend to convert such donations into valuable resources, most often by reselling these donated items. There are specific rules for vehicle donations. If the donated vehicle is to be sold within three years of the donation, the following apply:
- If the deduction claimed is $500 or less, then the lesser of FMV or $500 can be claimed as a deduction. A receipt describing the contributed vehicle including, as relevant, the odometer reading, make, model, year, and VIN should be provided by the recipient organization. The receipt should also include a statement that the recipient organization sells their vehicle donations.
- For deductions where the FMV is greater than $500, the contribution is limited to the lower of the FMV or the amount received upon the subsequent sale of the vehicle by the organization. Form 1098-C must be supplied within 30 days of the sale of the vehicle, reporting the amount received from sale of the donated vehicle. A receipt which includes all the information required for Form 1098-C may be provided in lieu of 1098-C and it must include the EIN/TIN of the donor to be considered complete. Copies of 1098-C along with a 1096 must be filed by the recipient organization for all vehicle donations with a claimed value of more than $500. If the donor is claiming a deduction of $5,000 or greater, Part B of Form 8283 must be completed by the donor and the donee must sign Part V. In addition, the donee organization will also have to file Form 8282 with the IRS and provide a copy to the donor.
- The limitation of lower of FMV or the amount received from sale of the vehicle does not apply if the charity intends to make a significant intervening use of the vehicle. The acknowledgement to the donor must include a statement certifying that the charity intends to make a significant intervening use of the donated vehicle, a detailed statement of the intended use, a detailed statement of the duration of that use, and a certification that the vehicle will not be sold before completion of the use.
- The other exclusion to the previous rule is if the charity intends to make a material improvement to the vehicle, in addition to the information required for all acknowledgments, the contemporaneous written acknowledgment must include a statement that the charity intends to make a material improvement to the donated vehicle, a detailed description of the intended material improvement, and a certification that the vehicle will not be sold before completion of the improvement.
Real Estate Donations
Real Estate donations can be divided into two categories: (1) immediate or outright gifts and (2) deferred gifts (commonly known as planned giving.)
Included in (1) is an outright gift, which is the simplest and most common method of donating real estate. The deed or title is transferred from the donor to the charity. A donor will then receive a tax deduction equal to the fair market value of the property and that deduction may be carried forward for up to five years. In the case of a bargain sale, when the donor sells the property for less than its FMV to a charity, the difference between the fair market value and the sales price is then considered a donation. This allows the donor to recoup funds and receive a tax deduction for the donated portion. This can be a win-win scenario for the donor and the charity. Bargain sales of appreciated property have additional rules and limitations but may provide valuable opportunities for organizations seeking to procure or purchase a property for its use.
Outright real estate gifts qualify for income tax deductions for the FMV or cost value of the basis of the property. The distinction depends on whether the donated property is a short-term or long-term assets. The type of asset is determined by whether the asset has been held for more than one year (long term) or one year or less (short term). The tax deductibility of a short-term assets is its cost basis. A long-term asset can be deducted at its FMV subject to a 30% of AGI limitation. However, the donor can elect cost basis as the donation value which increases the limitation to 50% of AGI.
Depreciated real estate is typically subject to §1250 rules, which apply to buildings and structural components. When depreciated on a straight-line basis (as are all real properties put in use after 1986) they do not have “depreciation recapture” and the donation can be deducted for the full FMV.
Deferred gifts include charitable remainder gifts, charitable gift annuities and retained life estates. These structures are more complicated and beyond the scope of this article.
As with other non-cash contributions, Form 8283 must be prepared, and for amounts more than $5,000, a qualified appraisal must be obtained, and donee acknowledgment must be included on Part V of Form 8283.
Donations of non-cash property can be very beneficial to tax-exempt organizations and provide valuable tax savings to the donor. However, depending on the property donated, the tax rules can be complicated. Contact your tax advisor for more information.
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